ASIA SHINY LTD v. LEUNG KAI YUEN

HCA 1322/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1322 OF 2005

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REASONS  FOR  DECISION

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1. There are three applications before me:

(i) the defendant's application for security for costs;

(ii) the plaintiff's application for summary judgment;

(iii) the defendant's time summons for amendment of the defence and counter-claim.

2. I will deal with the Order 14 application first and, in the course of it, I will assume that leave has been granted for filing the amended defence and counter-claim. 

Summary Judgment

3. The plaintiff's case rested wholly on implied terms instead of express term, although it would have been better for the case to be framed in the alternative.  Mr Yee's submission was that he would win on establishing any one of them.  I will therefore analyse those three implied terms. 

The Implied Terms

4. Term A.  In my view, this was not prima facie inconsistent with the express terms of the provisional agreement (PSPA).  If the defendant were allowed to sell the property to any other person, it would give him the right to unilaterally breach the PSPA and it would be against both the letter and spirit of the agreement.  The defendant had apparently breached the implied term by letting the auction go ahead on 21 January 2005 which had the effect of transferring the title to the developer.  However, notwithstanding this view, I cannot decide in favour of the plaintiff in view of the subsequent developments.  If there was an act of breach by the defendant, say, by 21 January, it is arguable that the plaintiff's subsequent conduct might have waived it as, subsequent to this date, the consent of the developer was pursued and the plaintiff had insisted on performance of the PSPA.  Resolution of the implied Term A per se in favour of the plaintiff would not be decisive of the matter. 

5. Term B.  I have reservations on this term as presently framed.  The parties deliberately by contract gave the defendant the full period up to 31 March 2005 to obtain consent from the developer.  Whilst the case of Agroexport suggested that the defendant should, soon after the PSPA was entered into, seek consent of the developer, arguably on the authority of Aberfoyle Plantation Ltd, he had a longer time to do so.  It is at least arguable whether the words implying a curtailment of this period was justified.  Term B is therefore arguable in itself. 

6. Term C.  The validity of this term turned on the real subject matter of the PSPA. The plaintiff claimed that it was the property with the attendant benefits under the Development Agreement that was the subject matter. The defendant submitted that it was just the property. I have asked Mr Li, counsel for the defendant, what the difference in substance between the two alleged subject matter was.  He could not give any satisfactory answer.  In my view, to use the analogy of Mr Yee, counsel for the plaintiff, the defendant has contracted to sell a tadpole to the plaintiff.  To both parties' knowledge, this tadpole carried with it the genes that would enable it to mature into a frog or even a prince.  When the tadpole eventually turned into a frog, it was no defence to say that performance was impossible. The plaintiff could still ask for the frog which was inseparable from the tadpole. In fact, I have asked Mr Li that if the developer's consent was forthcoming, what should the defendant give over to the plaintiff and which part of the benefits under the Development Agreement could he retain, on his case.  Again, Mr Li could not give any satisfactory answer.  I do not see any inconsistency between Term C and the PSPA. 

7. Even if any of these three Terms could be implied into the PSPA and even if I were to hold in favour of the plaintiff on any one of them, there are other issues arising out of the subsequent conduct which one must look into.  In this respect, it is appropriate now to construe Clause B first. 

The Express Term - Breach of Clause B

8. There are heavy outer garments in this case in terms of pleadings and submission but it is important not to lose sight of the central issues which emerge from Clause B.  In construing this contractual term, I have borne in mind the following:

(i) The fact that one party lacked knowledge of the full terms of the PSPA or failed to understand the meaning was irrelevant.  In this case, the Development Agreement has been incorporated by express reference and parties would be taken to know the terms.  They were legally represented throughout the conveyancing part anyway. 

(ii) The fact that one party was a property speculator was irrelevant.  No terms could be implied and no knowledge imputed to that status. 

(iii) The so-called background information described by Mr Li was often irrelevant when the meaning of a term was clear on the face of a contract.  The defendant has purportedly brought in the part played by Centaline by alleging representation (not misrepresentation).  It was not the defendant's case that there was an implied term for Centaline to seek the developer's consent.  The relevance of this background information was obscure. 

(iv) Facts arising after making of the PSPA could hardly assist in its construction.  Facts, for example, that the defendant's father had asked for more money, was completely irrelevant as to who had what obligation and whether it had been breached. 

9. With these principles in mind, I have attempted to set out the central issues arising from construction of Clause B. 

(i) What was the consent from the developer contemplated?

(ii) Who should apply for the consent?

(iii) When should consent be sought?

(iv) If the obligation was on the plaintiff, had the plaintiff obtained the consent?

(v) If the defendant had the obligation, had he obtained the consent?

(vi) Whether or not the plaintiff had waived or acquiesced in the defendant's breach. 

(i) What was the consent contemplated? 

10. Clause B referred to consent given “under the terms of the Development Agreement”.  There could be no other construction but that it referred to consent under clause 2.05.  There was no other developer's consent referred to in the Development Agreement.  In fact, not being the legal owner but only a developer with contingent rights, what other consent beyond the ambit of clause 2.05 was the developer qualified to give?  The answer must be none. 

(ii) Who should apply for consent? 

11. The plaintiff was a complete stranger to the property.  At all relevant times, the defendant had been the legal owner although his rights to sell were circumscribed with his agreement with the developer.  The natural inference was that it was the defendant who should apply, particularly since he had to bear the costs of obtaining the consent. 

12. The reference to Centaline, as I say, was obscure.  That company was stated to have made representation.  It has not been pleaded that Centaline was to make any application for consent.  In any case, Centaline was as much the plaintiff's agent as the defendant's.  Any so-called factual matrix of the pre-contract position could not affect the court's construction of the PSPA to find out who was responsible for applying for consent. 

(iii)  When to apply for consent?

13. As I have indicated, when analysing Term B of the implied terms, this is arguable. 

(iv)  If the plaintiff should apply had they got the consent?

14. The plaintiff had applied to the developer and Messrs JSM put forward certain terms principally along the lines contemplated in the Development Agreement and PSPA.  The only “uncertainty”, if any, was the quantum of costs to be charged by JSM under clauses 5 and 6 of their letter dated 24 March 2005.  I will come back to these later on. 

(v)  If the defendant should apply for consent, had he done so?

15. The defendant explained why he had not applied earlier by referring to terms of the Development Agreement and the power of attorney which he was required to execute pursuant thereto.  With respect, these terms and the power of attorney had been in existence even before the PSPA.  If he genuinely considered that he would not be able to apply for consent anyway, he should not have entered into the PSPA at all.  This explanation could not hold water. 

16. The defendant also prayed in aid the notice issued by the chairman at page 791.  I can hardly see how this notice could even start to affect the parties' obligations.  The notice was issued only by the chairman, not even purporting to be a decision of the majority owners' committee.  The contents were, as Mr Yee says, double hearsay and the contents did not show anything that should bind the plaintiff or the defendant.  The parties' views of its contents were irrelevant.  Taken at the highest, the plaintiff was aware of this notice and knew that before the developer got the title, the developer would not give consent to sell.  It would thus be futile for the defendant to make any application.  However, by 3 March at the latest, there was already indication of the developer's willingness to give consent.  If the defendant were sincere in his attempt to seek consent, he could have applied there and then. 

17. It is noteworthy that prior to 3 March, JSM had never actually refused to give consent.  The circumstances showed that if the defendant had purportedly applied for consent, it was less than half-hearted. 

18.  Consequent upon (iv) and (v), one has to ask: had the developer actually given consent by JSM's letters dated 24 and 30 March?  In my view, it is arguable that notwithstanding the defendant had to bear all the costs of obtaining costs,  the defendant was not obliged to accept all the terms set out in those letters.  The plaintiff had not indicated any willingness to bear all costs even if the defendant failed to do so under clauses 5 and 6.

19. Mr Yee says that the burden of proof was on the defendant to show that even if he had applied, the developer's consent would not be forthcoming or perhaps the terms were not acceptable.  This might be a right statement of the burden of proof.  However, I cannot dispel from my mind the doubt: (i) whether, if the defendant had applied earlier for consent, JSM would have come up with terms different from those in the letters dated 24 and 30 March; and (ii) whether the defendant could have a defence to the terms imposed. 

(vi)  Waiver or Acquiescence in the Defendant's Breach

20. Mr Li submitted that the plaintiff might have been aware of the sale of the lot and had permitted it to happen without protest.  Even if this might be true, in my view, it did not advance the defendant's case.  Events subsequent to the sale of the lot clearly showed that the plaintiff was hotly pursuing their rights under the PSPA and at no time had they waived their rights.

Summary

21. Having regard to the above analyses, I am of the view that there are arguable issues of fact involved.  One finding may create impact on another.  It is not therefore appropriate to deprive the defendant of his day in court.  I therefore give unconditional leave to defend. 

The Amendments

22. In view of my conclusion on the Order 14, I shall give leave to defend and then permit the defence to put in the amended version out of time.  Service is dispensed with. 

Security for Costs

23. The principles are not in dispute.  The issues on this application are:

(i) Has the defendant met the threshold test for section 357 of the Companies Ordinance by showing that the plaintiff will be, not may be, unable to pay a costs order against them?

(ii) Are the chances of success of the plaintiff so high that the court ought to exercise its discretion not to order security?

(iii) The appropriate quantum. 

Meeting the Threshold Test

24. It is true that the lack of assets per se is not evidence of the plaintiff's inability to pay costs when ordered.  The plaintiff has shown that it has been able to meet its contractual obligations to pay the initial and further deposits and that the present litigation is funded by Mr Lai.  Mr Yee submits that the defendant has failed to adduce evidence to the effect that Mr Lai will be unable to meet any adverse costs order. 

25. With respect, this is the wrong test.  The proof of inability should relate to the company and not its director.  It is precisely because the company itself is unable to meet its obligations on contract and costs that Mr Lai personally has to fund the same.  In the present application, the defendant's evidence does not just stop at producing evidence analogous to that in the Gladson China Ltd case.  There is more.  It is demonstrated that the plaintiff does not appear to have an actual registered office.  The company seems to have no business or assets of its own and, without disrespect, Mr Yee's submission overlooks the possibility that Mr Lai might be willing to back up the litigation when there is a chance to win, but might back out when he knows for certain that the plaintiff will lose. 

26. I am of the view that the threshold test has been met by the defendant. 

High Probability of Success

27. It was not fortuitous for the plaintiff to be plaintiff.  There is strong prima facie evidence of the defendant being in breach and the arguments advanced by Mr Yee, in my view, are highly respectable.  If the threshold test on resisting Order 14 were not as low as raising a triable issue, the result today might have been different.  Unfortunately, I do not think the authorities say that this will be sufficient to meet the test of high probability of success to warrant a refusal of a security order, but I do take into account the merits of the plaintiff's claim when I come to assess the quantum. 

Quantum

28. Security will only cover the costs of defending but not counter-claiming.  In the present case, I note that the plaintiff's claim is for damages.  The counter-claim is really for declarations and vacation of registration of the lis pendens.  The counter-claim, however, is closely connected to and quite inseparable from the defence.  It is reasonable to expect that the bulk of the defendant's costs must be on defending. 

29. Complexity of a matter is certainly a relevant matter for consideration but so is the amount or subject matter at stake.  In the present case, the breach - any breach - has occurred within about half a year of the making of the PSPA.  When one talks about damages, it is probably reflected by any rise in value of the property with the attendant rights under the development agreement in this short interval of time.  There must be a sense of proportionality so that parties will think carefully before unnecessarily taking or defending interlocutory applications or pursue the matter to the bitter end.  In considering the defence and opposition to the Order 14, I cannot help feeling that there has been some unnecessary complication introduced and thus that must be reflected in the order for security. 

30. The court will order security and not indemnity. 

31. I have looked at the bill.  Given the tendency to use gross-sum bills these days, asking an LCD to draft a complicated bill for security for costs application was totally unjustified and no costs thereon will be allowed.  The letter before this application asked for costs in the region of $400,000-odd.  The costs now sought has escalated to over $700,000.  The increase was said to reflect the three applications before me.  Whilst recognising that conveyancing cases might not always be easy, it must be remembered that the same firm of solicitors had acted for the defendant throughout.  Some costs of the litigation would, in fact, duplicate with that of the conveyancing part.  Taking a global view, $300,000 for the three applications before me are clearly excessive. 

32. I have taken into account Mr Yee's objection but, without disrespect, I have to disagree with him.  The court looks at the nature of the work to be done.  With regard to witness statements, it is not necessarily the case that counsel should not get himself involved. 

33. I have taken into account all circumstances - the merits of each party's claim or defence; the unnecessary complication I have mentioned introduced into the defence.  I am of the view that appropriate security would be in the sum of $250,000 up to and including the exchange of witness statements.  This can be furnished by payment into court or provision of security in a form satisfactory to the Registrar within 21 days. 

Costs

34. In terms of costs, this is my provisional view on the costs of the Order 14.  The draft amended defence was put in after the Order 14 application was taken out  and, having heard arguments, I am not of the view that the plaintiff's case was doomed to fail from the start.  It appears that costs in the cause should be the appropriate order. 

35. For the time summons, the defendant was clearly out of time and I agree with Mr Yee that it was not necessary to take out this time summons in total disregard of the Order 14 summons.  The plaintiff is entitled to costs anyway. 

36. For costs on the security summons, it looks to be costs to follow the event and costs should be borne by the plaintiff.  But unless the defendant can show me good reasons, although I am prepared to do gross-sum assessment and fix a sum now, I will order the sum to be paid in any event.